Starting on January 21, 2011, shareholders of U.S. companies will be able to give a thumbs up or a thumbs down to executive pay packages. You may remember that the “say on pay” vote was first introduced as a safeguard when U.S. financial institutions dubbed “too big to fail” received federal bailout funds thanks to the Troubled Asset Relief Program (TARP). Today, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that all public companies conduct say-on-pay votes at least once every three years. According to Say on Pay: Will U.S. Shareholders Give Executives the Thumbs Up on Compensation?, an article published in the online business journal Knowledge@Wharton, shareholders will also be asked for their views on golden parachute awards after a merger or acquisition and pension funds and other large institutional investors that cast ballots must disclose how they voted.
In the article, Wayne Guay, a Wharton accounting professor who consults on executive compensation plans, questions whether the new voting system can help improve pay packages. In his view, any analysis of pay packages by institutional investors would be trivial when compared to the work of various corporate boards. Interestingly, the article includes data from Towers Watson, a compensation advisory firm, that backs Professor Guay. According to Towers Watson, of the companies that voluntarily adopted say-on-pay voting in advance of Dodd Frank, only three companies failed to receive majority support for their compensation programs in 2010, and no company failed to receive majority support in 2009.
In my view, Wharton Professor Micahel Useem sums the pros and cons of the new law nicely. While he says the big benefit will be the increased transparency into the design of executive pay structures, he cautions that if boards become too focused on compensation issues, they may fail to dedicate the time necessary for long-term corporate planning.